The economic backdrop is that the major European economies are expanding, significantly led by the UK in the finance and service industries, and by Germany in international trading. In real terms, individual disposable income continues to consistently rise.
Against this backdrop, European carmakers struggle to stay out of the red despite increasing volumes.
Competition caused by over-capacity remains the major culprit, forced by incentives to shift ageing models and prop up inefficient factories – some running at only 30% of production capacity with 80% utilization considered acceptable.
Segment-splitting has become almost a game, with manufacturers making new niche models to meet customer demand which they believe exists.
The net effect on profitability is to force an extra set of development costs into a relatively small number of cars manufactured, thus reducing unit contribution to profits. But it also enables carmakers to respond more rapidly to changing customer demand, as witnessed by the current move from large to medium SUVs.
While the European premium car makers are relatively profitable, the volume carmakers are almost without exception fighting hard to stay in the black, partly supported by retailing actions and partly by increasing development and production efficiency. It has proven difficult to close down manufacturing plants that are operating way under capacity.
Intensifying competition from the Far East is ramping up the agony for the volume manufacturers. Toyota is now the top manufacturer with 14% of the global market, while Hyundai group is sixth at 6.6% and accelerating rapidly.
Most significantly, JD Power economists illustrate that the European economy has a clear history of cyclical ‘boom-and-bust’, predicting the next strong down-turn is most likely to happen around 2014. So, what are the implications in the UK? European manufacturers are set to continue using a wide range of methods to force more metal through the retailing system – the underlying motive being to keep their slow moving car production lines vaguely viable.
The carmakers will continue to wring costs out of buying, production, stocks and distribution, but are likely to give away the savings in incentives.
The consumer, meanwhile, is becoming ever more fashion conscious. This influences model facelift and replacement cycles.
All manufacturers are attempting to compact model development and replacement into three-year cycles to remain competitive against Far Eastern car makers, which have already shown how it is done.
JD Power research has also shown a clear relationship between customer satisfaction and the volume fortunes by brand. Dissatisfied customers are increasingly defecting to other brands.
Further market distortion has been created by emissions awareness campaigns and there is already evidence that large SUV sales are suffering in all western countries.